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*Continue
to provide liquidity as required but progressively lower the average
ex ante liquidity deficit in the system from one per cent of NDTL to
a position closer to neutrality

Assessment

Since
the second bi-monthly statement of June 2016, several developments
have clouded the outlook for the global economy. Q2 growth has been
slower than anticipated across AEs, with the Brexit
vote increasing uncertainty. Among EMEs, activity remains varied. GDP
growth stabilised in China in Q2. Recessionary conditions are
gradually diminishing in Brazil and Russia, but the near-term outlook
is still fragile. In India, monsoon related developments engender
greater confidence about the near-term outlook for value added in
agriculture. Barring the contraction in natural gas and crude oil on
account of structural bottlenecks, the core sector has been resilient
as of 2016-17 so far, and should support industrial activity going
forward. There are some signs of green shoots in manufacturing too,
with PMIs and the Reserve Bank’s industrial outlook survey
indicating a pick-up in new orders, both domestic and external. High
frequency indicators of service sector activity are still, however,
emitting mixed signals, although a larger number of indicators are in
acceleration mode in Q1 of 2016-17. Merchandise export growth moved
into positive territory in June after eighteen months, with a
reasonably widespread upturn. While lower crude oil prices continued
to compress the POL import bill, non-oil non-gold imports
continued to shrink. Successive downgrades of global growth
projections by multilateral agencies and the continuing sluggishness
in world trade points to further slackening of external demand going
forward. The recent sharper-than-anticipated increase in food
prices has pushed up the projected trajectory of inflation. CPI
inflation rose to a 22-month high in June, with a sharp pick-up in
momentum overwhelming favourable base effects. The rise was mainly
driven by food, with vegetable and sugar inflation higher than the
usual.

International
financial markets did not anticipate the Brexit
vote and equities plunged worldwide, currency volatility increased
and investors herded into safe havens. Since then, however, equity
markets have regained lost ground. Currencies, barring the pound
sterling, have stabilized. While the pace of FDI inflows to India
slowed in the first two months of 2016-17, net portfolio flows were
stronger after the Brexit
vote, notwithstanding considerable volatility characterising these
flows. The level of foreign exchange reserves rose to US$365.7
billion by August 5, 2016.

Liquidity
conditions eased significantly during June and July on the back of
increased spending by the Government which more than offset the
reduction in market liquidity because of higher-than-usual currency
demand. The injection of durable liquidity through purchases under
OMOs, amounting to Rs. 805 billion so far, also helped in easing
liquidity conditions, bringing the system-level ex
ante
liquidity deficit to close to neutrality (without seasonal
adjustment). Accordingly, the average daily liquidity operation
switched from net injection of liquidity of Rs. 370 billion in June
to net absorption of Rs. 141 billion in July and Rs. 405 billion in
August (up to August 8). The Reserve Bank conducted variable rate
repos and reverse repos of varying tenors in order to manage evolving
liquidity conditions, with a more active use of reverse repos to
manage the surplus liquidity. Reflecting the easy liquidity
conditions, the weighted average call rate (WACR) and money market
weighted average rate remained on average 15 basis points below the
policy repo rate since June.

Policy
Stance and Rationale

A
normal monsoon and the 7th Pay Commission award likely to boost
growth

Implementation
of GST should raise returns to
investment and thus business

sentiment
and eventually investment

Impact
of direct effect of house rent allowances under the 7th CPC’s
award need to be watched

Monetary
policy to remain accommodative and will continue to emphasise the
adequate provision of liquidity

The
refinements to the liquidity management framework effected in April
2016 were intended to smooth the supply of durable liquidity over the
year using asset purchases and sales as needed, and progressively
lower the average ex
ante liquidity
deficit in the system to a position closer to neutrality. The Reserve
Bank intends to continue with this strategy, with the intention of
closing the underlying liquidity deficit over time so that the system
moves to a position of structural balance.

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Our Blog covers issues of interest on the Indian economy, Indian economic policy, Indian Financial markets and Global economic prospects. ECOFIN-SURGE offers a vast and comprehensive compilation of Indian data covering Macro-economic variables like GDP, Government Finances, Industrial & Agricultural Production indices, Inflation and Banking & Financial market indicators like Interest rates, Stock & Commodity market indices. All efforts are made to provide time series data for quality econometric research work. ECOFIN-SURGE also gives you snapshots of the global economy by providing crucial indicators for economies like the US, Euro-zone, UK, Japan and other Asian countries as well as some Latin American countries. We also bring out a monthly statistical bulletin with important economic/financial indicators, both Indian and Global. All our data is compiled from reliable sources like Government and Central bank websites. The compilation of data here is meant to help you save a lot of your valuable time and efforts in gathering data, allowing you more time for your core research.